FOREX MARKET HISTORY

FOREIGN EXCHANGE MARKET
INDEX
SR PAGE
PARTICULAR
NO. NO.
1 Executive summery 2-2
2 History Of FEM 3-5
3 TimeLine Of FEM 6-6
4 Meaning Of FEM 7-8
5 Features Of FEM 9-10
6 Function Of FEM 11-13
7 Difference Between Hedging & Speculation 14-14
8 Dealers in FEM 15-17
9 Types Of FEM 18-22
10 How the FEM Work 23-28
11 What is Exchange Rate 29-30
12 How Exchange Rate is Determined 31-32
13 Factors Influence Exchange Rate 33-36
14 RBI Intervention in FEM 37-41
15 Conclusion 42-42
16 Bibliography 43-43
EXECUTIVE SUMMARY:
The topic is about foreign exchange market i.e forex. The first is history about forex i.e how
forex is originate and Bretton wood accord The foreign exchange market is a global
decentralized market for the trading of currencies. The foreign exchange market determines
the relative values of different currencies. There are features such as liquidity, promptness,
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Economics of Global Trade & Finance
etc. There are functions also such as hedging, provision of credit, etc. Further is difference
between the hedging and speculation which shows the difference.
There are dealers in foreign exchange market like retail clients, commercial banks, etc. they
are dealing with buying and selling transactions. There are types of forex such as forward
contract and spot. how the forex is works under market i.e Transactions in foreign currencies
are not centralized on an exchange, unlike say the NYSE, and thus take place all over the
world via telecommunications.
What is exchange rate? In a direct quotation, the foreign currency is the base currency and the
domestic currency is the counter currency. Exchange rates can be floating or fixed. Further is
how exchange rate is determined here we know how is determined, then there are factors
influenced in exchange rate such as inflation, interest rates, etc.
After this there is RBI intervention in forex i.e foreign exchange market, in that there are
functions, tools, approach, evolution of forex and also the data for all where we know the
position and also there are percentages for other banks how much they earn in market how
much they got loss.
The above is short summary about Foreign exchange market.
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HISTORY OF FOREIGN EXCHANGE

MARKET:
The foreign exchange market (fx or forex) as we know it today originated in 1973. However,
money has been around in one form or another since the time of Pharaohs. The Babylonians
are credited with the first use of paper bills and receipts, but Middle Eastern moneychangers
were the first currency traders who exchanged coins from one culture to another. During the
middle ages, the need for another form of currency besides coins emerged as the method of
choice. These paper bills represented transferable third-party payments of funds, making
foreign currency exchange trading much easier for merchants and traders and causing these
regional economies to flourish.
From the infantile stages of forex during the Middle Ages to WWI, the forex markets were
relatively stable and without much speculative activity. After WWI, the forex markets became
very volatile and speculative activity increased tenfold. Speculation in the forex market was
not looked on as favorable by most institutions and the public in general. The Great
Depression and the removal of the gold standard in 1931 created a serious lull in forex market
activity. From 1931 until 1973, the forex market went through a series of changes. These
changes greatly affected the global economies at the time and speculation in the forex
markets during these times was little, if any.
The Bretton Woods Accord:
The first major transformation, the Bretton Woods Accord, occurred toward
the end of World War II. The United States, Great Britain and France met at
the United Nations Monetary and Financial Conference in Bretton Woods,
N.H. to design a new global economic order. The location was chosen
because, at the time, the U.S. was the only country unscathed by war.
Most of the major European countries were in shambles. Up until WWII,
Great Britain's currency, the Great British Pound, was the major currency
by which most currencies were compared. This changed when the Nazi
campaign against Britain included a major counterfeiting effort against its
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currency. In fact, WWII vaulted the U.S. dollar from a failed currency after
the stock market crash of 1929 to benchmark currency by which most
other international currencies were compared. The Bretton Woods Accord
was established to create a stable environment by which global economies
could restore themselves. The Bretton Woods Accord established the
pegging of currencies and the International Monetary Fund (IMF) in hope of
stabilizing the global economic situation.
Now, major currencies were pegged to the U.S. dollar. These currencies
were allowed to fluctuate by one percent on either side of the set
standard. When a currency's exchange rate would approach the limit on
either side of this standard the respective central bank would intervene to
bring the exchange rate back into the accepted range. At the same time,
the US dollar was pegged to gold at a price of $35 per ounce further
bringing stability to other currencies and world forex situation.
The Bretton Woods Accord lasted until 1971. Ultimately, it failed, but did
accomplish what its charter set out to do, which was to re-establish
economic stability in Europe and Japan.
The Beginning of the free-floating system
After the Bretton Woods Accord came the Smithsonian Agreement in

December of 1971. This agreement was similar to the Bretton Woods
Accord, but allowed for a greater fluctuation band for the currencies. In
1972, the European community tried to move away from its dependency
on the dollar. The European Joint Float was established by West Germany,
France, Italy, the Netherlands, Belgium and Luxemburg. The agreement
was similar to the Bretton Woods Accord, but allowed a greater range of
fluctuation in the currency values.
Both agreements made mistakes similar to the Bretton Woods Accord and
in 1973 collapsed. The collapse of the Smithsonian agreement and the
European Joint Float in 1973 signified the official switch to the free-floating
system. This occurred by default as there were no new agreements to take
their place. Governments were now free to peg their currencies, semi-peg
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or allow them to freely float. In 1978, the free-floating system was
officially mandated.
In a final effort to gain independence from the dollar, Europe created the
European Monetary System in July of 1978. Like all of the previous
agreements, it failed in 1993.
The major currencies today move independently from other currencies.

The currencies are traded by anyone who wishes. This has caused a recent
influx of speculation by banks, hedge funds, brokerage houses and
individuals. Central banks intervene on occasion to move or attempt to
move currencies to their desired levels. The underlying factor that drives
today's forex markets, however, is supply and demand. The free-floating
system is ideal for today's forex markets. It will be interesting to see if in
the future our planet endures another war similar to those of the early
20th century. If so, how will the forex markets be affected? Will the dollar
be the safe haven it has been for so many years?
TIMELINE OF FOREIGN EXCHANGE:
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1944 : Bretton Woods Accord is established to help stabilize the global economy after
World War II.
1971: Smithsonian Agreement established to allow for greater fluctuation band for
currencies.
1972: European Joint Float established as the European community tried to move
away from its dependency on the U.S. dollar.
1973: Smithsonian Agreement and European Joint Float failed and signified the
official switch to a free-floating system.
1978 :The European Monetary System was introduced so other countries could try to
gain independence from the U.S. dollar.
1978 :Free-floating system officially mandated by the IMF.
1993: European Monetary System fails making way for a world-wide free-floating
system.
MEANING OF FOREIGN
EXCHANGE MARKET:
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The foreign exchange market (forex, FX, or currency market) is a global decentralized
market for the trading of currencies. The main participants in this market are the larger
international banks. Financial centers around the world function as anchors of trading
between a wide range of different types of buyers and sellers around the clock, with the
exception of weekends. Electronic Broking Services (EBS) and Reuters 3000 xtra are two
main interbank FX trading platforms. The foreign exchange market determines the relative
values of different currencies.
The foreign exchange market works through financial institutions, and it operates on several
levels. Behind the scenes banks turn to a smaller number of financial firms known as
dealers, who are actively involved in large quantities of foreign exchange trading. Most
foreign exchange dealers are banks, so this behind-the-scenes market is sometimes called the
interbank market, although a few insurance companies and other kinds of financial firms
are involved. Trades between foreign exchange dealers can be very large, involving hundreds
of millions of dollars] Because of the sovereignty issue when involving two currencies, Forex
has little (if any) supervisory entity regulating its actions.
The foreign exchange market assists international trade and investment by enabling currency
conversion. For example, it permits a business in the United States to import goods from the
European Union member states, especially Eurozone members, and pay euros, even though
its income is in United States dollars. It also supports direct speculation in the value of
currencies, and the carry trade, speculation based on the interest rate differential between two
currencies.
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In a typical foreign exchange transaction, a party purchases some quantity of one currency by
paying some quantity of another currency. The modern foreign exchange market began
forming during the 1970s after three decades of government restrictions on foreign exchange
transactions (the Bretton Woods system of monetary management established the rules for
commercial and financial relations among the world's major industrial states after World War
II), when countries gradually switched to floating exchange rates from the previous exchange
rate regime, which remained fixed as per the Bretton Woods system.
FEATURES
Liquidity:
The market operates the enormous money supply and gives absolute freedom within
opening or closing a position in the current market quotation. High liquidity is a
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powerful magnet for any investor, because it gives him or her the freedom to open or
to close a position of any size whatever.
Promptness:
With a 24-hour work schedule, participants in the FOREX market need not wait to
respond to any given event, as is the case in many markets.
Availability:
A possibility to trade round-the-clock; a market participant need not wait to respond
to any given event.
Flexible regulation of the trade arrangement system:

A position may be opened for a pre-determined period of time in the FOREX market,
at the investors discretion, which enables to plan the timing of ones future activity in
advance.
Value:
The Forex market has traditionally incurred no service charges, except for the natural
bid/ask market spread between the supply and the demand price.
One-valued quotations:
With high market liquidity, most sales may be carried out at the uniform market price,
thus enabling you to avoid the instability problem existing with futures and other
forex investments where limited quantities of currency only can be sold concurrently
and at a specified price.
Market trend:
Currency moves in a quite specific direction that can be tracked for rather a long
period of time. Each particular currency demonstrates its own typical temporary
changes, which presents investment managers with the opportunities to manipulate
the FOREX market.
Margin:
The credit leverage (margin) in the FOREX market is only determined by an
agreement between a customer and the bank or the brokerage house that pushes it to
9
the market and is normally equal to 1:100. That means that, upon making a $1,000
pledge, a customer can enter into transactions for an amount equivalent to $100,000.
FUNCTIONS OF FOREIGN EXCHANGE

MARKET
10
Hedgi
ng
Provision
Of Credit
The main functions of foreign exchange market include:
Transfer of Purchasing Power:

The resident of one country require the currency of another country to make payments
to resident of another country. The payment in foreign currency results in transfer of
purchasing power from the payers country to the receiver country.
For instance Indian residents may require US $ to make payments in respect of the
following transition:
Payments in account of import of goods and services
Payment of dividend, interest, and profit to foreign firms
unilateral payments
Capital outflows- investment abroad, short and long term lending, etc.
Similarly the resident of USA may have to transfer purchasing power to india for
importing goods or investing in indian markets aor for some other transition. therefore
Indian residents will receive purchasing power o account of the following
transactions:
Receipts on account of export of goods and services

Receipts of dividends, interest and profit by firms or citizens from abroad
Unilateral receipts
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Capital receipts- foreign investment in India, NRI deposits, borrowing, etc.
Thus foreign exchange market facilities the transfer of purchasing power of currencies
between the residents of different countries.
Provision of Credit for foreign Trade:
The foreign Exchange market facilities the provision of credit for foreign trade
transactions. provision of credit in repect of foreign trade takes place through credit
instrument such as:
Letter of credit(LC); which is an undertaking given by importers bank guaranteeing

payment to the exporters on behalf of exporter. The exporter can draw drafts/bills
against the LC amount.
Documentary bills of exchange, which are of two types:
1. DP(documents against acceptance) bills, in which case the shipping documents are
handed over to the importer only against payment
2. DA(documents against acceptance) bills, where the shipping documents are handed
over to the importer on acceptance of bill.
Credit instruments such as DA bills or reafts drawn against LC amount are time
drafts/bills. the credit may vary upto 180 days of consumer goods (s per rbi directives)
and deferred (beyond 180days) in case of capital goods. The beneficiaries of credit
instruments can discount them with their bankes before the due date. therefore, the
instruments enable the exporters to obtain advance from commercial banks.
Hedging of foreign exchange risks:
Exporters (who sell on credit) receive foreign exchange at a future dare, and also the
importers (who buy on credit) make payments at a later date. The exporters and
importers may suffer loss on account of fluctuations in exchange rate. however, the
foreign exchange market enables the exporters and importers to cover the possible
risk of loss due to changes in exchange by hedging.
Illustration:
Let us assume that an Indian importer goods from USA worth US $10,000. He has to
make payments within 6months to the seller. the current spot rate is 1US $ =45/-.
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Therefore Indian importer would require to make payments os rs 450000 at the
current spot.
The Indian importer may anticipate that the exchange rate may change due to
depreciation of indian rupee and therefore he may have to pay more than Rs45 per
dollar six months hence. Therefore he may enter into a hedging contract to buy dollar
forward with a financial institution.
DIFFERENCE BETWEEN
HEDGING AND SPECULATION
Hedging involves taking an offsetting position in a derivative in order to balance any gains
and losses to the underlying asset. Hedging attempts to eliminate the volatility associated
with the price of an asset by taking offsetting positions contrary to what the investor currently
has. The main purpose of speculation, on the other hand, is to profit from betting on the
direction in which an asset will be moving.
Hedgers reduce their risk by taking an opposite position in the market to what they are trying
to hedge. The ideal situation in hedging would be to cause one effect to cancel out another.
For example, assume that a company specializes in producing jewelry and it has a major
contract due in six months, for which gold is one of the company's main inputs. The company
is worried about the volatility of the gold market and believes that gold prices may increase
substantially in the near future. In order to protect itself from this uncertainty, the company
could buy a six-month futures contract in gold. This way, if gold experiences a 10% price
increase, the futures contract will lock in a price that will offset this gain. As you can see,
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although hedgers are protected from any losses, they are also restricted from any gains.
Depending on a company's policies and the type of business it runs, it may choose to hedge
against certain business operations to reduce fluctuations in its profit and protect itself from
any downside risk.
Speculators make bets or guesses on where they believe the market is headed. For example, if
a speculator believes that a stock is overpriced, he or she may short sell the stock and wait for
the price of the stock to decline, at which point he or she will buy back the stock and receive
a profit. Speculators are vulnerable to both the downside and upside of the market; therefore,
speculation can be extremely risky.
Overall, hedgers are seen as risk averse and speculators are typically seen as risk lovers.
DEALERS IN FOREIGN EXCHANGE

MARKET
Indian foreign exchange is made up of three tiers, In the first tier, the dealing takes olace
between the reserve bank of india and authorize dealers(ADS) compromising maily
commercial banks. In the second tier, the Ads deal with each other. In the third tier, the ADs
deal with corporate customers.
Foreign exchange market need dealers to facilitate foreign exchange transactions.
Bulk of foreign exchange transactions are dealt by commercial banks and financial
institutions. other than commercial banks and financial institutions. RBI has allowed private
authorized dealers to deal with foreign exchange transaction i.e buying and selling foreign
currency.
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Foreign
Commercial
Exchange
Banks
Brokers
Retail Clients Cental Bank
Dealers in
FEM
Retail Clients:
These comprise people, international investors, multinational corporations and others
who need foreign exchange. Retail clients include deal through commercials banks
and authorized dealers.
Commercials Banks:
They carry put buy and sell orders (relating to foreign exchange) from their retail
clients and on their own account. They deal with other commercial banks and aslo
through foreign exchange brokers.
Foreign Exchange Brokers:

Each foreign exchange market center has some authorized brokers. Broker act as an
important intermediaries between buyers and sellers, mainly the banks. Commercial
banks prefer the broker as banks could obtain the most favorable quotations from
them.
Central Bank:
Under the fiexible exchange rate the central bank of the country normaly does not the
interfere in the exchange market. However, since1970s most of the central bank
15
frequently inter-vend to buy and sell their currencies in an attempt to stabise the
exchange rate.
The above groups are the sources from where demand and supply forces generates
which in turn help determine the foreign exchange rate.
The foreign market is broadly divided into

Retail
wholesale market
In the retail market, travellers, tourist, and individual who are in need of foreign
exchange for permitted small transactions ezchange one currency for another. the
retail market is a secondary price make
The wholesale market is also called the inter bank market. commercial banks,
business corporations and central banks are the main participants in this segment of
the market. The size of transactions I the market is very large. The dealers here are
hidhly professionally and are the primary price makers. Big players like multinational
banks exert a lot of influence in the market and are mainly responsible for influencing
the exchange rate.
Brokers act as middleman between the price makers. They provide information to the
banks about the prices at which there are buyers and sellers for currencies. Most of the
banks (except the major ones) deal through brokers who purchase an sell foreign
currencies on behalf of others. Broker possess more information and better knowledge
of market.
The price taker in the foreign exchange market are those who buy the foreign
exchange which they require and sell at a price determined by the primary price
makers.
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TYPES OF FOREIGN EXCHANGE

MARKET
The foreign exchange currency markets allow buying and selling of various currencies all
over the world. Business houses and banks can purchase currency in another country in order
to do business in that particular company. The forex market also known as FX market has a
worldwide presence and a network of different currency traders who work around the clock
to complete these forex transactions, and their work drives the exchange rate for currencies
around the world. Since the foreign exchange currency market is one of the biggest markets
of the world, the market is sub divided into different kinds of foreign exchange market. There
are different features and characteristics associated with the different foreign exchange
markets have different trading characteristics. The main three types of foreign exchange
markets- the spot foreign exchange market, the forward foreign exchange market and the
future foreign exchange market are discussed below.
Future
Forward
Spot
Type
s of
FEM
17
Spot Market
The spot kinds of foreign exchange market are those in which the commodity is
bought or sold for an immediate delivery or delivery in the very near future. The
trades in the spot markets are settled on the spot. The spot foreign currency market is
among the most popular foreign currency instrument around the globe, contributing
about 37 percent of the total activity happening in all other types of foreign exchange
markets. Spot forex currency markets types are opposite to other kinds of foreign
exchange market such as the future market, in which there is a set date is mentioned.
The perfect example of most common kinds of trades of spot foreign exchange market
is forex contracts. If these contracts are not settled immediately, the forex traders
would expect to be compensated for the time value of their money for the duration of
the delivery. The important point to note is that these contracts are settled
electronically thus making forex markets essentially instantaneous. The spot forex
currency markets types are considered to be highly paced markets and volatility and
quick profits and losses are its important features.
A spot deal in foreign exchange market comprises of a bilateral contract between two
parties in which a party transfers a set amount of a particular given currency against
the receipt of a specified amount of another currency from the counterparty, based on
an agreed exchange rate, within two business days of the date when the deal gets
finalized. However, there is an exception in case of Canadian dollar. In Canadian
dollar, the Spot delivery happens the very next business day. The name spot does not
mean that the currency exchange happens the same business day on which the deal is
executed. Forex currency transactions which require delivery on the same day are
called as cash transactions. It is interesting to know that the two day spot delivery has
been in place since long before there were any technological breakthroughs in
information processing facilitating the instantaneous transactions. This time period
was required to check all the transactions details among the participating companies.
Despite the technological breakthrough in forex trading markets, the contemporary
markets dont find it necessary to reduce the time to make payments. Because human
errors still happen and time is required to fix the errors, if any before the delivery. In
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case of wrong deliveries happen in a spot deal in foreign exchange market, the fine is
imposed.
The most traded currency in spot types of foreign exchange markets in terms of
volume is US dollar. The reason being is that U.S. dollar is the currency of reference.
The other major most common currencies traded in spot markets are the euro,
followed by the Japanese yen, the British pound, and the Swiss franc.
Forward Market
The forward Forex currency markets types comprise of two currency trading
instruments- forward outright deals and swaps. The swap currency deal is different
from the other kind of forex instruments in a way that it consists of two deals, while
all other transactions consist of single deals. A swap is a combination of a spot deal
and a forward outright deal. Generally, forward foreign exchange market deals in cash
transactions only. This is the reason why the transactions of the forward types of
foreign exchange markets are separately analyzed. Based on the data shared by the
Bank for International Settlements, the percentage share of the forward kinds of
foreign exchange market was 57% in the year 1998. The forward markets have no set
terms with regard to the settlement dates and this range from 3 days to 3 years. The
volume in currency swaps longer than one year tends to be light but, technically, there
is no impediment to making these deals. Any date past the spot date and within the
above range may be a forward settlement, provided that it is a valid business day for
both currencies.
The nature of forward types of foreign exchange markets is decentralized, with

participants from all over the world entering into a different types of forex deals either
on a one on one basis or through forex brokers. In contrast to this, the currency futures
Foreign exchange market is a centralized one and where all the deals are executed on
trading floors provided by different exchanges. Whereas in the futures market only a
small number of foreign currencies are traded in multiples of standardized amounts.
The forward types of foreign exchange markets are open to any currencies in any
amount.
Futures Market
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Future Forex currency markets types are specific types constitute the forward outright
deals which in general take up small part of the foreign exchange currency trading
market. Since future contracts are derivatives of spot price, they are also known as
derivative instruments. They are specific with regard to the expiration date and the
size of the trade amount. In general, the forward outright deals which get mature past
the spot delivery date will mature on any valid date in the two countries whose
currencies are being traded, standardized amounts of foreign currency futures mature
only on the third Wednesday of March, June, September, and December.
Future kinds of foreign exchange markets have many features, which attracts traders
to future markets. The first thing is that any one can trade in future market. It is open
to all kind of traders in foreign exchange market including individual traders. This is
the difference between the future foreign exchange market and the spot foreign
exchange market, since spot market is closed to individuals traders except in case
there are deals of high net worth. The future forex currency market types are central
markets, just as efficient as the cash market, and whereas the cash market is a much
decentralized market, futures trading take place under one roof. The futures market
provides various benefits for currency traders because futures are special types of
forward outright contracts which corporate firms can use for hedging purposes.
Although the futures and spot markets trade closely together, certain differences
between the two occur, thus giving away the arbitraging opportunities. Gaps, volume,
and open interest are important technical analysis tools solely available in the futures
markets. Because of these benefits, currency futures trading regularly attract a large
number of forex traders into this market. The traders who are outside the exchange
can have the idea about the prices from on-line monitors. The most common pages
regarding future markets are available with Reuters, Bridge, Telerate, and Bloomberg.
The rates are presented on composite pages by the Telerate, while the currency futures
are represented on individual pages showing the convergence between the futures and
spot prices by Reuters and Bloomberg.
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HOW THE FOREIGN EXCHANGE

MARKET WORKS
Trade Forex and make money
For those unfamiliar with the term, FOREX (Foreign Exchange market), refers to an
international exchange market where currencies are bought and sold. The Foreign Exchange
Market that we see today began in the 1970's, when free exchange rates and floating
currencies were introduced. In such an environment only participants in the market determine
the price of one currency against another, based upon supply and demand for that currency
FOREX is a somewhat unique market for a number of reasons. Firstly, it is one of the few
markets in which it can be said with very few qualifications that it is free of external controls
and that it cannot be manipulated. It is also the largest liquid financial market, with trade
reaching between 1 and 1.5 trillion US dollars a day. With this much money moving this fast,
it is clear why a single investor would find it near impossible to significantly affect the price
of a major currency. Furthermore, the liquidity of the market means that unlike some rarely
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traded stock, traders are able to open and close positions within a few seconds as there are
always willing buyers and sellers
The currency exchange quotes, often a two-sided, might look a bit different. When dealing
with currency brokers, they consist of 'bid' and 'ask' price. The 'bid' is the price at which you
can sell the base currency. The 'ask' is the price at which you can buy the base currency.
Traders are forced to buy the currency in a higher price than the selling one. As the currency
exchange trades are done without any commission chargers, the currency brokers still manage
to make profit by quoting currency 'bid & ask' price differently in this way.
No doubt, currency exchange market is fast gaining popularity all across the world as
compared to any other kind of trading. It is beneficial to a large number of people, as there is
no limited market access, no liquidity issues-after market hours, zero commission fees, low
capital requirements with high leverage rates, and no restrictions on short selling.
Letting you have as much flexibility as possible, currency exchange trading can be a very
promising business career, provided you learn and practice a lot before you test the real
waters. Educate yourself with plenty of seminars, e-Books, Internet, papers, video courses,
which will help you gain confidence before you trade with your real hard-earn dollars. Its
important to learn all about the functioning of currency exchange market before you start.
Another somewhat unique characteristic of the FOREX money market is the variance of its
participants. Investors find a number of reasons for entering the market, some as longer term
hedge investors, while others utilize massive credit lines to seek large short term gains.
Interestingly, unlike blue-chip stocks, which are usually most attractive only to the long term
investor, the combination of rather constant but small daily fluctuations in currency prices,
create an environment which attracts investors with a broad range of strategies.
How forex works
Transactions in foreign currencies are not centralized on an exchange, unlike say the
NYSE, and thus take place all over the world via telecommunications. Trade is open
24 hours a day from Sunday afternoon until Friday afternoon (00:00 GMT on Monday
22
to 10:00 pm GMT on Friday). In almost every time zone around the world, there are
dealers who will quote all major currencies. After deciding what currency the investor
would like to purchase, he or she does so via one of these dealers (some of which can
be found online). It is quite common practice for investors to speculate on currency
prices by getting a credit line (which are available to those with capital as small as
$500), and vastly increase their potential gains and losses. This is called marginal.
Marginal Trading
Marginal trading is simply the term used for trading with borrowed capital. It is
appealing because of the fact that in FOREX investments can be made without a real
money supply. This allows investors to invest much more money with fewer money
transfer costs, and
open bigger positions with a much smaller amount of actual capital. Thus, one can
conduct relatively large transactions, very quickly and cheaply, with a small amount
of initial capital. Marginal trading in an exchange market is quantified in lots. The
term "lot" refers to approximately $100,000, an amount which can be obtained by
putting up as little as 0.5% or $500.
Example:
You believe that signals in the market are indicating that the British Pound will go up
against the US Dollar. You open 1 lot for buying the Pound with a 1% margin at the
price of 1.49889 and wait for the exchange rate to climb. At some point in the future,
your predictions come true and you decide to sell. You close the position at 1.5050
and earn 61 pips or about $405. Thus, on an initial capital investment of $1,000, you
have made over 40% in profits. (Just as an example of how exchange rates change in
the course of a day, an average daily change of the Euro (in Dollars) is about 70 to
100 pips.)
When you decide to close a position, the deposit sum that you originally made is
23
returned to you and a calculation of your profits or losses is done. This profit or loss is
then credited
Investment Strategies: Technical Analysis and Fundamental Analysis
The two fundamental strategies in investing in FOREX are Technical Analysis or

Fundamental Analysis. Most small and medium sized investors in financial markets
use Technical Analysis. This technique stems from the assumption that all information
about the market and a particular currency's future fluctuations is found in the price
chain. That is to say, that all factors which have an effect on the price have already
been considered by the market and are thus reflected in the price. Essentially then,
what this type of investor does is base his/her investments upon three fundamental
suppositions. These are: that the movement of the market considers all factors, that the
movement of prices is purposeful and directly tied to these events, and that history
repeats itself. Someone utilizing technical analysis looks at the highest and lowest
prices of a currency, the prices of opening and closing, and the volume of
transactions. This investor does not try to outsmart the market, or even predict major
long term trends, but simply looks at what has happened to that currency in the recent
past, and predicts that the small fluctuations will generally continue just as they have
before.
A Fundamental Analysis is one which analyzes the current situations in the country of
the currency, including such things as its economy, its political situation, and other
related rumors. By the numbers, a country's economy depends on a number of
quantifiable measurements such as its Central Bank's interest rate, the national
unemployment level, tax policy and the rate of inflation. An investor can also
anticipate that less quantifiable occurrences, such as political unrest or transition will
also have an effect on the market. Before basing all predictions on the factors alone,
however, it is important to remember that investors must also keep in mind the
expectations and anticipations of market participants. For just as in any stock market,
the value of a currency is also based in large part on perceptions of and anticipations
about that currency, not solely on its reality.
24
Trade Forex and make money
FOREX investing is one of the most potentially rewarding types of investments

available. While certainly the risk is great, the ability to conduct marginal trading on
FOREX means that potential profits are enormous relative to initial capital
investments. Another benefit of FOREX is that its size prevents almost all attempts by
others to influence the market for their own gain. So that when investing in foreign
currency markets one can feel quite confident that the investment he or she is making
has the same opportunity for profit as other investors throughout the world. While
investing in FOREX short term requires a certain degree of diligence, investors who
utilize a technical analysis can feel relatively confident that their own ability to read
the daily fluctuations of the currency market are sufficiently adequate to give them the
knowledge necessary to make informed investments.
25
Here are some of the most common currency pairs:
1)EUR/USD - Euro/U.S. Dollar

2)GBP/USD - Great British Pound/U.S. Dollar
3)USD/CHF - U.S. Dollar/Swiss Franc
4)USD/JPY - U.S. Dollar/Japanese Yen
5)USD/CAD - U.S. Dollar/Canadian Dollar
6)AUD/USD - Australian Dollar/U.S. Dollar
7)EUR/GBP - Euro/Great British Pound
8)EUR/JPY - Euro/Japanese Yen
9)EUR/CHF - Euro/Swiss Franc
10)GBP/CHF - Great British Pound/Swiss Franc
11)GBP/JPY - Great British Pound/Japanese Yen
12)CHF/JPY - Swiss Franc/Japanese Yen
13)NZD/USD - New Zealand Dollar/US Dollar
14)EUR/CAD - Euro/Canadian Dollar
15)AUD/CAD - Australian Dollar/Canadian Dollar
16)AUD/JPY - Australian Dollar/Japanese Yen
17)EUR/AUD - Euro/Australian Dollar
26
WHAT IS EXCHANGE RATE

An exchange rate has a base currency and a counter currency. In a direct quotation, the
foreign currency is the base currency and the domestic currency is the counter currency. In an
indirect quotation, the domestic currency is the base currency and the foreign currency is the
counter currency.
Most exchange rates use the US dollar as the base currency and other currencies as the
counter currency. However, there are a few exceptions to this rule, such as the euro and
Commonwealth currencies like the British pound, Australian dollar and New Zealand dollar.
Exchange rates for most major currencies are generally expressed to four places after the
decimal, except for currency quotations involving the Japanese yen, which are quoted to two
places after the decimal.
Lets consider some examples of exchange rates to enhance

understanding of these concepts.
1) US$1 = C$1.1050. Here the base currency is the US dollar and the counter currency is
the Canadian dollar. In Canada, this exchange rate would comprise a direct quotation
of the Canadian dollar. This is easy to understand intuitively, since prices of goods
27
and services in Canada are expressed in Canadian dollars; therefore the price of a US
dollar in Canadian dollars is an example of a direct quotation for a Canadian resident.
2) C$1 = US$ 0.9050 = 90.50 US cents. Here, since the base currency is the Canadian
dollar and the counter currency is the US dollar, this would be an indirect quotation of
the Canadian dollar in Canada.
3) If US$1 = JPY 105, and US$1 = C$1.1050, it follows that C$1.1050 = JPY 105, or
C$1 = JPY 95.02. For an investor based in Europe, the Canadian dollar to yen
exchange rate constitutes a cross currency rate, since neither currency is the domestic
currency.
Exchange rates can be floating or fixed. While floating exchange rates in which
currency rates are determined by market force are the norm for most major nations,
some nations prefer to fix or peg their domestic currencies to a widely accepted
currency like the US dollar.
Exchange rates can also be categorized as the spot rate which is the current rate or
a forward rate, which is the spot rate adjusted for interest rate differentials.
28
HOW EXCHANGE RATE IS

DETERMINED
An exchange rate is a price - exactly the same as any other price - the amount you have to
give up to acquire something else - in this case another currency. So an exchange rate is the
price of one currency in terms of another. In other words it is the price you will pay in one
currency to get hold of another. The price can be set in various ways. It may be fixed by the
government or it could perhaps be linked to something external - for example, gold.
However, the most likely alternative is that it will be fixed in a market. Since it is a price, it
will be determined, like any other price, by demand and supply. This is the supply and
demand of pounds traded on the foreign exchange market and is NOT the amount of sterling
in circulation! A high level of demand for a currency will force up its price - the exchange
rate. Where supply is equal to demand is the equilibrium exchange rate, as shown in the
diagram below.
The demand for comes from people who are investing in the UK from abroad and so need
pounds, or from firms who are buying UK exports. They will need pounds to be able to pay
for the goods. The supply comes from people in the UK who are selling pounds. This may be
because they have bought goods from overseas (imports), or it may simply be that they are
29
investing in another country and so need the local currency. To get this they have to sell
pounds in exchange for the other currency.
The equilibrium rate is where supply is equal to demand, and this will change as supply and
demand changes. Say, for example, that interest rates increase. This will tend to attract more
overseas investment into the UK. To invest here, they will need to buy pounds, and so the
demand for pounds will rise. We can see this on the diagram below:
As we can see, both the exchange rate and the volume of currency traded have increased.
This will not inevitably be the effect as there may be other factors affecting the exchange rate
at the same time. A lot will also depend on whether the foreign exchange market expected the
interest rate increase or not. However, supply and demand gives us a very useful tool for
analyzing movements in the exchange rate.
30
FACTORE INFLUENCE
EXCHANGE RATE
Aside from factors such as interest rates and inflation, the exchange rate is one of the most
important determinants of a country's relative level of economic health. Exchange rates play a
vital role in a country's level of trade, which is critical to most every free market economy in
the world. For this reason, exchange rates are among the most watched, analyzed and
governmentally manipulated economic measures. But exchange rates matter on a smaller
scale as well: they impact the real return of an investor's portfolio. Here we look at some of
the major forces behind exchange rate movements.
Overview
Before we look at these forces, we should sketch out how exchange rate movements
affect a nation's trading relationships with other nations. A higher currency makes a
country's exports more expensive and imports cheaper in foreign markets; a lower
currency makes a country's exports cheaper and its imports more expensive in foreign
markets. A higher exchange rate can be expected to lower the country's balance of
trade, while a lower exchange rate would increase it.
Determinants of Exchange Rates

Numerous factors determine exchange rates, and all are related to the trading
relationship between two countries. Remember, exchange rates are relative, and are
expressed as a comparison of the currencies of two countries. The following are some
of the principal determinants of the exchange rate between two countries. Note that
these factors are in no particular order; like many aspects of economics, the relative
importance of these factors is subject to much debate.
31
Inflation
Pollitical Interest
Stability Rate
Factors
Terms of Current
Trade Account
Public
Debt
Differentials in Inflation
As a general rule, a country with a consistently lower inflation rate exhibits a rising
currency value, as its purchasing power increases relative to other currencies. During
the last half of the twentieth century, the countries with low inflation included Japan,
Germany and Switzerland, while the U.S. and Canada achieved low inflation only
later. Those countries with higher inflation typically see depreciation in their currency
in relation to the currencies of their trading partners. This is also usually accompanied
by higher interest rates. (To learn more, see Cost-Push Inflation Versus Demand-Pull
Inflation.)
Differentials in Interest Rates

Interest rates, inflation and exchange rates are all highly correlated. By manipulating
interest rates, central banks exert influence over both inflation and exchange rates, and
changing interest rates impact inflation and currency values. Higher interest rates
offer lenders in an economy a higher return relative to other countries. Therefore,
higher interest rates attract foreign capital and cause the exchange rate to rise. The
impact of higher interest rates is mitigated, however, if inflation in the country is
much higher than in others, or if additional factors serve to drive the currency down.
32
The opposite relationship exists for decreasing interest rates - that is, lower interest
rates tend to decrease exchange rates. (For further reading, see What Is Fiscal Policy?)
Current-Account Deficits
The current account is the balance of trade between a country and its trading partners,
reflecting all payments between countries for goods, services, interest and dividends.
A deficit in the current account shows the country is spending more on foreign trade
than it is earning, and that it is borrowing capital from foreign sources to make up the
deficit. In other words, the country requires more foreign currency than it receives
through sales of exports, and it supplies more of its own currency than foreigners
demand for its products. The excess demand for foreign currency lowers the country's
exchange rate until domestic goods and services are cheap enough for foreigners, and
foreign assets are too expensive to generate sales for domestic interests. (For more,
see Understanding The Current Account In The Balance Of Payments.)
Public Debt
Countries will engage in large-scale deficit financing to pay for public sector projects
and governmental funding. While such activity stimulates the domestic economy,
nations with large public deficits and debts are less attractive to foreign investors. The
reason? A large debt encourages inflation, and if inflation is high, the debt will be
serviced and ultimately paid off with cheaper real dollars in the future.
In the worst case scenario, a government may print money to pay part of a large debt,
but increasing the money supply inevitably causes inflation. Moreover, if a
government is not able to service its deficit through domestic means (selling domestic
bonds, increasing the money supply), then it must increase the supply of securities for
sale to foreigners, thereby lowering their prices. Finally, a large debt may prove
worrisome to foreigners if they believe the country risks defaulting on its obligations.
Foreigners will be less willing to own securities denominated in that currency if the
risk of default is great. For this reason, the country's debt rating (as determined by
Moody's or Standard & Poor's, for example) is a crucial determinant of its exchange
rate.
33
Terms of Trade
A ratio comparing export prices to import prices, the terms of trade is related to
current accounts and the balance of payments. If the price of a country's exports rises
by a greater rate than that of its imports, its terms of trade have favorably improved.
Increasing terms of trade shows greater demand for the country's exports. This, in
turn, results in rising revenues from exports, which provides increased demand for the
country's currency (and an increase in the currency's value). If the price of exports
rises by a smaller rate than that of its imports, the currency's value will decrease in
relation to its trading partners.
Political Stability and Economic Performance

Foreign investors inevitably seek out stable countries with strong economic
performance in which to invest their capital. A country with such positive attributes
will draw investment funds away from other countries perceived to have more
political and economic risk. Political turmoil, for example, can cause a loss of
confidence in a currency and a movement of capital to the currencies of more stable
countries.
Conclusion
The exchange rate of the currency in which a portfolio holds the bulk of its
investments determines that portfolio's real return. A declining exchange rate
obviously decreases the purchasing power of income and capital gains derived from
any returns. Moreover, the exchange rate influences other income factors such as
interest rates, inflation and even capital gains from domestic securities. While
exchange rates are determined by numerous complex factors that often leave even the
most experienced economists flummoxed, investors should still have some
RBI INTERVENTION IN
34
The Reserve Bank of India (RBI) is the nations central bank. Since 1935, when it began its
operations, it has stood at the center of Indias financial system, with a fundamental
commitment
to maintaining the nations monetary and financial stability.
Main Functions
Monetary Authority
Regulator and supervisor of the financial system
Manager of Foreign Exchange
Issuer of currency
Developmental role
RBI as Manager of Foreign Exchange

With the transition to a market-based system for determining the external value of the
Indian rupee, the foreign exchange market in India gained importance in the early
reform period. In recent years, with increasing integration of the Indian economy with
35
the global economy arising from greater trade and capital flows, the foreign exchange
market has evolved as a key segment of the Indian financial market.
Approach
The Reserve Bank plays a key role in the regulation and development of the foreign
exchange market and assumes three broad roles relating to foreign exchange:
Regulating transactions related to the external sector and facilitating the development
of the foreign exchange market
Ensuring smooth conduct and orderly conditions in the domestic foreign exchange
market
Managing the foreign currency assets and gold reserves of the country
Tools
The Reserve Bank is responsible for administration of the Foreign Exchange
Management Act,1999 and regulates the market by issuing licences to banks and other
select institutions to act as Authorised Dealers in foreign exchange. The Foreign
Exchange Department (FED) is responsible for the regulation and development of the
market.
On a given day, the foreign exchange rate reflects the demand for and supply of
foreign exchange arising from trade and capital transactions. The RBIs Financial
Markets Department (FMD) participates in the foreign exchange market by
undertaking sales / purchases of foreign currency to ease volatility in periods of
excess demand for/supply of foreign currency.
The Department of External Investments and Operations (DEIO) invests the countrys
foreign exchange reserves built up by purchase of foreign currency from the market.
In investing its foreign assets, the Reserve Bank is guided by three principles:
Safety,
Liquidity
Return.
Evolution of Indian Foreign Exchange Market
36
The evolution of Indias foreign exchange market may be viewed in line with the
shifts in Indias exchange rate policies over the last few decades. With the breakdown
of the Bretton Woods System in 1971 and the floatation of major currencies, the
conduct of exchange rate policy posed a serious challenge to all central banks world
wide as currency fluctuations opened up tremendous opportunities for market players
to trade in currencies in a borderless market. In order to overcome the weaknesses
associated with a single currency peg and to ensure stability of the exchange rate, the
rupee, with effect from September 1975, was pegged to a basket of currencies. The
impetus to trading in the foreign exchange market in India since 1978 when banks in
India were allowed to undertake intra-day trading in foreign exchange. The exchange
rate of the rupee was officially determined by the Reserve Bank in terms of a
weighted basket of currencies of Indias major trading partners and the exchange rate
regime was characterised by daily announcement by the Reserve Bank of its buying
and selling rates to the Authorised Dealers (ADs) for undertaking merchant
transactions. The spread between the buying and the selling rates was 0.5 percent and
the market began to trade actively within this range and the foreign exchange market
in India till the early 1990s,remained highly regulated with restrictions on external
transactions, barriers to entry, low liquidity and high transaction costs. The exchange
rate during this period was managed mainly for facilitating Indias imports and the
strict control on foreign exchange transactions through the Foreign Exchange
Regulations Act (FERA) had resulted in one of the largest and most efficient parallel
markets for foreign exchange in the world
As a stabilisation measure, a two step downward exchange rate adjustment in July

1991
effectively brought to close the regime of a pegged exchange rate. Following the
recommendations of Rangarajans High Level Committee on Balance of Payments, to
move towards the market-determined exchange rate, the Liberalised Exchange Rate
Management System (LERMS) was introduced in March 1992, was essentially a
transitional mechanism and a downward adjustment in the official exchange rate and
ultimate convergence of the dual rates was made effective and a market-determined
exchange rate regime was replaced by a unified exchange rate system in March 1993,
whereby all foreign exchange receipts could be converted at market determined
37
exchange rates. On unification of the exchange rates, the nominal exchange rate of the
rupee against both the US dollar as also against a basket of currencies got adjusted
lower. Thus, the unification of the exchange rate of the Indian rupee was an important
step towards current account convertibility, which was finally achieved in August
1994, when India accepted obligations under Article VIII of the Articles of Agreement
of the IMF.
With the rupee becoming fully convertible on all current account transactions, the risk
bearing capacity of banks increased and foreign exchange trading volumes started
rising. This was supplemented by wide-ranging reforms undertaken by the Reserve
Bank in conjunction with the Government to remove market distortions and deepen
the foreign exchange market. Several initiatives aimed at dismantling controls and
providing an enabling environment to all entities engaged in foreign exchange
transactions have been undertaken since the mid-1990s.The focus has been on
developing the institutional framework and increasing the instruments for effective
functioning, enhancing transparency and liberalising the conduct of foreign exchange
business so as to move away from micro management of foreign exchange
transactions to macro management of foreign exchange flows. Along with these
specific measures aimed at developing the foreign exchange market, measures
towards liberalising the capital account were also implemented during the last decade.
Thus, various reform measures since the early1990s have had a profound effect on the
market structure, depth, liquidity and efficiency of the Indian foreign exchange
market.
Foreign Exchange Intervention
In the post-Asian crisis period, particularly after 2002-03, capital flows into India
surged creating space for speculation on Indian rupee. The Reserve Bank intervened
actively in the forex market to reduce the volatility in the market. During this period,
the Reserve Bank made direct interventions in the market through purchases and sales
of the US Dollars in the forex market and sterilised its impact on monetary base. The
Reserve Bank has been intervening to curb volatility arising due to demand-supply
mismatch in the domestic foreign exchange market
38
CONCLUSION
Thus here I conclude my topic that foreign exchange market is we know it today
originated in 1973. The foreign exchange market is important market for buying and
selling transaction and currencies.
Currency trading still takes place on a decentralized market in which most customers
rely on professional dealers to provide liquidity. Currencies are still traded to facilitate
international trade, hedge risk, earn speculative returns, and to profit from market
making. The US dollar,
Japanese yen, and euro remain the dominant currencies and trading is still
concentrated in London and New York. The best-informed agents in the market
continue to be financial institutions, especially hedge funds. Corporate customers
continue to eschew speculative trading in spot markets and provide liquidity.
FX trading was done by phone, transparency was low, and customer transaction costs
were high. The lack of transparency resulted in high levels of interdealer trading
relative to end customer trading. In the early 1990s the introduction of electronic
39
brokers to the interdealer market brought a huge increase in transparency and the
share of interbank trading began to fall even while trading volumes rose.
BIBLOGRAPHY:
www.wikipedia.com
www.scribd.com
www.slideshare.com
www.investipedia.com
Books:
Foreign Exchange Market:
Vipul Prakashan
Sheth Publication
40

FOREX MARKET HISTORY

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FOREX MARKET HISTORY

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FOREIGN EXCHANGE MARKET

The above is short summary about Foreign exchange market.

HISTORY OF FOREIGN EXCHANGE

The Bretton Woods Accord:

The Beginning of the free-floating system

After the Bretton Woods Accord came the Smithsonian Agreement in

The major currencies today move independently from other currencies.

TIMELINE OF FOREIGN EXCHANGE:

1978 :Free-floating system officially mandated by the IMF.

Flexible regulation of the trade arrangement system:

FUNCTIONS OF FOREIGN EXCHANGE

The main functions of foreign exchange market include:

Transfer of Purchasing Power:

Receipts on account of export of goods and services

Provision of Credit for foreign Trade:

Letter of credit(LC); which is an undertaking given by importers bank guaranteeing

Hedging of foreign exchange risks:

DEALERS IN FOREIGN EXCHANGE

Foreign exchange market need dealers to facilitate foreign exchange transactions.

Retail Clients Cental Bank

Foreign Exchange Brokers:

The foreign market is broadly divided into

TYPES OF FOREIGN EXCHANGE

The nature of forward types of foreign exchange markets is decentralized, with

HOW THE FOREIGN EXCHANGE

How forex works

Investment Strategies: Technical Analysis and Fundamental Analysis

The two fundamental strategies in investing in FOREX are Technical Analysis or

Trade Forex and make money

FOREX investing is one of the most potentially rewarding types of investments

Here are some of the most common currency pairs:

1)EUR/USD - Euro/U.S. Dollar

WHAT IS EXCHANGE RATE

Lets consider some examples of exchange rates to enhance

HOW EXCHANGE RATE IS

Determinants of Exchange Rates

Differentials in Interest Rates

Political Stability and Economic Performance

RBI as Manager of Foreign Exchange

Evolution of Indian Foreign Exchange Market

As a stabilisation measure, a two step downward exchange rate adjustment in July

Foreign Exchange Intervention

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